Why Caesars Splitting Won’t Be Enough

Shares are soaring, but CPZ still has three big problems

Since the stock came public last February, investing in Caesars Entertainment (NASDAQ:CZR) has been like a wild time at the roulette wheel. On the day of its offering, shares spiked 71%. Then, they went on to fall from over $18 to under $5, with the floor reached in November.

Today alone, Caesars has gained over 27%, bringing its price to three times last fall’s low.

So why all the excitement? Well, Caesars has announced that it will split into two companies. One will keep its holdings of the traditional casino businesses and the other — called Caesars Growth Partners LLC — will have the cool stuff. The assets will include the web/mobile business, Planet Hollywood in Las Vegas and the Horseshoe Baltimore, which is being built now.

Interestingly enough, private equity operators Apollo Management LP and TPG Capital will each invest $250 million in CGP. The parent company will keep a majority position, though.

While this strategy makes some sense, it really does not solve some key problems with Caesars. First of all, the company still has an enormous debt load of $24.1 billion, much of which came from its going-private transaction.

Also, the online gaming business is likely to be highly competitive. If anything, Zynga’s (NASDAQ:ZNGA) games are clearly dominant in the space and the company is making aggressive moves into real-money gambling.

Finally, the U.S. casino business has been stagnant and is likely to remain so. It does not help that many states have legalized gambling either, which has increased the competition. Keep in mind that Caesars gets about 95% of its revenues from the U.S. market.

No doubt, the real opportunities are in emerging markets, such as in China’s Macau. Unfortunately, Caesars missed out on this. It was instead Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and MGM Resorts International (NYSE:MGM) that locked up the opportunities in these lucrative markets.

So while the spin-off will provide more focus and capital, it will not really be enough to bring back some mojo for Caesars. The company will still take awhile to get back on track and find ways to boost cash flows to manage the enormous debt load.

Plus, with the big surge in the stock, investors are already fully anticipating that there will be progress on these fronts. Anything short of a success could get ugly real fast.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.